Hopefully, your financial neck-brace is fitted otherwise you could suffer from stock price whiplash. Down a 1000 here, up 600 there! More than 30-years of experience says major swings are a sign of uncertainty.
Increased volatility usually accompanies decision points. It’s also important to keep in mind that stock prices are reflections of future expectations. As such, the indexes are leading indicators, normally looking out six-to-nine months. It’s an imperfect science.
Since the COVID low, the expectation was the Federal Reserve and Federal Government would be exceedingly accommodative and push stimulus, stimulus, stimulus. The market was right, the Feds cooperated on cue and stocks recovered, and then some, in a hurry.
Now there is debate as to what’s next. Inflation and valuations are the two main concerns, both of which could have negative impacts on stock prices. Also, there is no way the market knows the lasting, residual damage done to small businesses, especially services, caused by government lockdowns.
Valuations are priced to perfection, as they say. Low interest rates and TRILLIONS in federal stimulus, with more on the way, have flooded the market with liquidity. Like water, all of that money has to go somewhere. It’s a recipe for higher prices i.e. inflation. You see it reflected in commodity prices. Have you been to the gas station lately? Looked at housing prices? And so on.
That brings us full circle to the market’s recent volatility and uncertainty, which are not necessarily bad. No, typically they are just transition points, precursors to the next stage. You might be wondering what’s next? Fortunately, prices leave clues and here is what we see.
The NASDAQ, the Mary of the markets as we put it last week, is in a box. If it pops through the top, it’s mostly good, but the index will have to set new highs to go full bull. The bottom of the box is dicey. If the NASDAQ recovers without making new highs and then falls back to 13,000, then the party could be over.
A rally followed by a close below 13k, and we’ll have a classic reversal pattern. In technical verbiage, it’s called head and shoulders. In practical terms, it’s like falling though a trap door. We don’t want that but must be prepared to act, just in case.
There really weren’t top performers last week, just sectors and industries that didn’t do as bad as others. As we pointed out in the top portion of the newsletter, inflation is one of the foremost concerns. Not surprisingly, inflation sensitive sectors did the best: oil, energy, banks, and brokers.
At times of uncertainty, we are uncomfortable tying our horse to any post. We will wait for Wall Street to answer the box question before picking a side.
If you’ve been a reader long enough, you know we’d “rather be out of the market wishing we were in than in wishing we were out.” Translated, it hurts more to lose money than it does to miss out on making money. Like sector plays, we’ll wait for the market’s green or red signal before taking action.